ManStrat ch04

Chapter 2
Strategic External
Environment
The Strategic
Management
Inputs
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Process
Strategy Formulation Strategy Implementation
Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11

Business-Level Competitive Corporate-Level Corporate Structure
Strategic
Actions
Strategy Dynamics Strategy Governance & Control
Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13

Acquisitions & International Cooperative Strategic Entrepreneurship
Restructuring Strategy Strategies Leadership & Innovation
Outcomes
Strategic
Strategic
Competitiveness
Above Average
Feedback
Returns
Ch4
Chapter 4
Types of Strategies
Fred
Fred R.
R. David
David
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Ch4
Learning Objectives
1. Identify 16 types of strategies.

2. Identify numerous examples of
organizations pursuing different types of
strategies.
3. Discuss guidelines when particular
strategies are most appropriate to pursue.
Ch4
Strategy
is an integrated and coordinated set of

commitments, decisions and actions
designed to exploit core competencies and
gain a competitive advantage
Ch4
Types of Strategies
• Most organizations simultaneously pursue a

combination of two or more strategies, but a
combination strategy can be exceptionally risky
if carried too far.
• No organization can afford to pursue all the
strategies that might benefit the firm.
• Difficult decisions must be made and priorities
must be established.
5-5
Ch4
Alternative Strategies Defined
and Exemplified
5-6
Ch4
Alternative Strategies Defined
and Exemplified
5-7
Ch4
Levels of Strategies With Persons
Most Responsible
5-8
Ch4
Integration Strategies
• Forward integration
– involves gaining ownership or increased control
over distributors or retailers
• Backward integration
– strategy of seeking ownership or increased
control of a firm’s suppliers
• Horizontal integration
– a strategy of seeking ownership of or increased
control over a firm’s competitors
5-9
Ch4
Intensive Strategies
• Market penetration strategy
– seeks to increase market share for present
products or services in present markets through
greater marketing efforts
• Market development
– involves introducing present products or services
into new geographic areas
• Product development strategy
– seeks increased sales by improving or modifying
present products or services
5-10
Ch4-
Diversification Strategies
• Related diversification • Unrelated
– value chains possess diversification
competitively valuable – value chains are so
cross-business strategic dissimilar that no
fits competitively valuable
cross-business
relationships exist
5-11
Ch4-
Defensive Strategies
• Retrenchment
– occurs when an organization regroups through
cost and asset reduction to reverse declining
sales and profits
– also called a turnaround or reorganizational
strategy
– designed to fortify an organization’s basic
distinctive competence
5-12
Ch4-
• Divestiture
– Selling a division or part of an organization
– often used to raise capital for further strategic
acquisitions or investments
5-13
Ch4-
• Liquidation
– selling all of a company’s assets, in parts, for
their tangible worth
– can be an emotionally difficult strategy
5-14
Ch4-
Chapter 4
Business-Level Strategy
Michael
Michael A.
A. Hitt
Hitt
R.
R. Duane
Duane Ireland
Ireland
Robert
Robert E.
E. Hoskisson
Hoskisson
©2000 South-Western College Publishing

Ch4-
Learning Objectives
1. Define business-level strategy.

2. Discuss the relationship between customers
and business-level strategies in terms of
who,what, and how.
3. Explain the differences among business-
level strategies.
Ch4-
Learning Objectives Continued
4. Use the five forces of competition model to

explain how above-average returns can be
earned through each business-level
strategy.
5. Describe the risks of using each of the
business-level strategies.
Ch4-
An integrated and coordinated set of

commitments and actions the firm uses to
gain a competitive advantage by exploiting
core competencies in specific product markets
The purpose of which is to create differences

between the firm’s position and those of its
competitors
Ch4-
Customers: Their Relationship
with Business-Level Strategies
1.Reach: firm’s access and connection to

customers (tv, radio or newspaper)
2.Richness: depth and detail of two-way
flow of information between the firm and
the customer (phone calls, video
conferencing and email)
3.Affiliation: facilitation of useful
interactions with customers Ch4-
Customer Needs—Who?
Determining the Customers to Serve
Consumer Customers Industrial

Markets Markets
Market Segmentation
20
Ch4-
Basis for Customer Segmentation
Consumer Markets
1. Demographic factors (age, income, sex, etc.)
2. Socioeconomic factors
(social class, stage in the family life cycle)
3. Geographic factors
(culture, region or country differences)
4. Psychological factors (lifestyle, personality traits)
5. Consumption patterns
(heavy, moderate, and light users)
6. Perceptual factors
(benefit segmentation, perceptual mapping)
7. Brand loyalty patterns
Ch4-
Basis for Customer Segmentation
Industrial Markets
1. End use segments (identified by SIC code)
2. Product segments (based on technological differences
or production economics)
3. Geographic segments (defined by boundaries
between countries or by regional differences within
them)
4. Common buying factor segments (cut across
product/market and geographic segments)
5. Customer size segments
Ch4-
Customer Needs—What?
 Customer needs are related to a

product’s benefits and features
 Customer needs are neither right nor
wrong, good nor bad
 Customer needs represent desires in
terms of features and performance
capabilities
23
Ch4-
Customer Needs—How?
 Firms use core competencies to

implement value creating strategies that
satisfy customers’ needs
 Only firms with capacity to
continuously improve, innovate and
upgrade their competencies can
expect to meet and/or exceed
customer expectations across time
24
Ch4-
Key Issues
Which good or
service to provide
Business-level How to
Strategy manufacture it
How to
distribute it
25
Ch4-
Ch4-
Generic Business Level Strategies
Source of Competitive Advantage
Cost Uniqueness
Broad Cost Differen-

Target
Market Leadership tiation
Breadth of
Competitive
Scope
Focused
Narrow Focused
Target Differen-
Market Low Cost
tiation
Ch4-
Cost Leadership
Strategy
 is an integrated
set of actions taken
to produce goods or
services with
features that are
acceptable to
customers at the
lowest cost, relative
to that of
competitors
Ch4-
Differentiation
Strategy
 is an integrated set
of actions taken to
produce goods or
services (at an
acceptable cost) that
customers perceive as
being different in
ways that are
important to them.
Ch4-
Focus
Strategy
 is an integrated
set of actions
taken to produce
goods or services
that serve the
needs of a
particular
competitive
segment
Ch4-
Ch4-
Cost Uniqueness

Target
Breadth of Integrated
Competitive Low Cost/
Scope Differentiation
Narrow Focused Focused
Target
Market Low Cost Differen-
tiation
Ch4-
Integrated Low
Cost/Differentiation
Strategy
 this strategy is
to efficiently
produce
products with
some
differentiated
attributes
Ch4-
Cost Leadership Business Level Strategy
Key Criteria:
Relatively standardized products
Features acceptable to many customers
Lowest competitive price
Ch4-
Cost Leadership Business Level Strategy
Requirements:
Constant effort to reduce costs through:
Building efficient scale facilities

Tight control of production costs and overhead
Minimizing costs of sales, R&D and service
State of the art manufacturing facilities
Monitoring costs of activities provided by outsiders
Simplification of processes
Ch4-
How to Obtain a Cost Advantage
1. Determine and Control Cost Drivers
2. Reconfigure the Value Chain as needed
Alter production process New raw material

Change in automation Forward integration
New distribution channel Backward integration
New advertising media Change location relative
Direct sales in place of to suppliers or buyers
indirect sales
Ch4-
Reconfiguring the Value Chain
of Iowa Beef Packers (IBP)
Old Ranch Ship “on the Slaughter “Boxed
Way: Cattle Hoof” to Rail into sides Cuts” at
Center of beef Markets
(Chicago)
New
New Locate large Ship cuts
Process into
Way: automated already
Way plants near
“Boxed Cuts” at
“Boxed” to
plants
ranches Markets
Save on shipping and cattle weight loss

Utilize cheaper non-union rural labor
Ch4-
Choices That Drive Costs
Economies of scale Product features
Asset utilization Performance
Capacity utilization pattern Mix & variety of products
- Seasonal, cyclical Service levels
Interrelationships Small vs. large buyers
- Order processing
and distribution Process technology
Value chain linkages Wage levels

- Advertising & Sales Product features
- Logistics & Operations
Hiring, training, motivation
Ch4-
Three Key Questions
1. How can an activity be performed

differently or even eliminated?
2. How can a group of linked value

activities be regrouped or reordered?
3. How might coalitions with other

firms lower or eliminate costs?
Gallo sold wine through grocery stores rather than liquor

stores because they were more efficient distributors
Ch4-
Effective Cost
Leaders can
remain profitable
even when the
Five Forces
appear
unattractive
Ch4-
Effective Cost Leaders can remain profitable even when
the Five Forces appear unattractive
Threat of
New
Entrants
Can frighten off New Entrants

due to the need to:
* Enter at large scale to

be Cost Competitive
* Take time to move down
the “Learning Curve”
Ch4-
Can frighten off New Entrants due

Threat of to the need to:
New * Enter at Large Scale to be
Cost Competitive
Entrants
* Take time to move down the
“Learning Curve”
Can mitigate Buyer Power by: Bargaining

Power of
* Driving prices far below competitors Buyers
may cause exit and shift power back
to firm
Ch4-

Well positioned relative toThreat
New
of to the need to:
* Enter at Large Scale to be
Substitutes in order to: Entrants Cost Competitive
* Make investments to create “Learning Curve”
substitutes first
* Buy patents developed by Bargaining
potential substitutes Power of
Buyers
* Lower prices to maintain
value position
Can mitigate Buyer Power by:
Driving prices far below

Threat of competitors which may
cause exit and shift power
Substitute back to firm
Products
Ch4-

Threat of to the need to:
Bargaining New * Enter at Large Scale to be
Cost Competitive
Power of Entrants
Suppliers “Learning Curve”
Can mitigate Supplier Power by: Bargaining

Power of
Buyers
* Low cost position makes them better
able torelative
Well positioned absorb
to cost increases Can mitigate Buyer Power by:
Substitutes in order to:
* More likely to make very
* Make investments to create substitutes large purchases
Threat of
Driving prices far below
competitors which may
* which
Can buy reduces
patents developed
potential substitutes
chance
by of supplier
Substitute power
cause exit and shift power
back to firm
* Lower prices to maintain Products
value position Ch4-
Competitors avoid
price wars with Cost
Can mitigate Supplier Power by: Leaders,
Can frighten offwhich
New Entrants due
Threat of
* Low cost position makes them
New
creates
* at
higher
to the need to:
Enter Large Scale
profits
to be
better able to absorb cost increases
* More likely to make very large Entrants for entire
Cost industry
Competitive
purchases which reduces chance “Learning Curve”
of supplier power
Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers
Well positioned relative to Can mitigate Buyer Power by:

Substitutes in order to:
* Make investments to create substitutes Driving prices far below
Threat of competitors which may
* Can buy patents developed by cause exit and shift power
potential substitutes Substitute
back to firm
* Lower prices to maintain Products
value position Ch4-
Major Risks of Cost Leadership
Business Level Strategy
Dramatic technological change could take

away your cost advantage
Competitors may learn how to imitate

Value Chain
Focus on efficiency could cause Cost Leader

to overlook changes in customer preferences
Ch4-
Cost Uniqueness
Broad Cost
Target
Market Leadership
Breadth of
Competitive
Scope
Narrow
Target
Market
Ch4-
Cost Uniqueness

Target
Breadth of
Competitive
Scope
Narrow
Target
Market
Ch4-
Differentiation Business Level Strategy
Key Criteria:
Value provided by unique features

and value characteristics
Command premium price

High customer service
Superior quality
Prestige or exclusivity
Rapid innovation
Ch4-
Requirements:
Constant effort to differentiate products through:
Developing new systems and processes
Shaping perceptions through advertising
Quality focus
Capability in R&D
Maximize Human Resource contributions
through low turnover and high motivation
Ch4-
Effectiveness with Differentiation
grows out of Value Chain activities
Examples:
Heineken beer Raw materials
Steinway pianos Raw materials & Workmanship
Mercedes Benz autos Technology and Workmanship
Intel microprocessors Technological superiority
Caterpillar tractors Service buyers’ needs quickly

anywhere in the world
Ch4-
Create Value with Differentiation by:
Lowering Buyers’ Costs
Raising Buyers’ Performance
Creating Sustainability through:

• Creating barriers by perceptions of uniqueness
• Creating switching costs through differentiation
Ch4-
Drivers of Differentiation
Examples:
Unique product features

Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information
Ch4-
Effective
Differentiators
can remain
profitable even
when the
Five Forces
appear
unattractive
Ch4-
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Can fend off New Entrants

because:
* New products must

surpass proven products
* Or be equal to performance
at lower prices
Ch4-
Can fend off New Entrants because:
Threat of New products must
*
New surpass proven products
Entrants * Or be equal to performance
at lower prices
Can mitigate Buyer Power because: Bargaining

Power of
Well differentiated products reduce Buyers
customer sensitivity to price increases
Ch4-
*
at lower prices
Well positioned relative to
Substitutes because:
Bargaining
* Brand loyalty tends to Power of
reduce new product trial Suppliers
and brand switching
Can mitigate Buyer Power
because well differentiated
Threat of products reduce customer
Substitute sensitivity to price increases
Products
Ch4-
*
at lower prices
Bargaining Can mitigate Supplier Power by:

Power of
Suppliers
* Absorbing price increases dueBargaining to
higher margins Power of
Well positioned relative to Suppliers
* Passing
Substitutes because:on higher supplier prices
because
* Brand buyers
loyalty tends to
reduce new product trial and
are brand loyal
Can mitigate Buyer Power
brand switching
Threat of because well differentiated
products reduce customer
Substitute sensitivity to price increases
Products
Ch4-
Can mitigate Supplier Power by:

Threat of Can fend off New Entrants because:
Absorbing price increases
*
due to higher margins New Brand
New
loyalty
products must
Entrants *
* Passing on higher supplier prices overcomes much
surpass proven products
because buyers are brand loyal
*price competition
Or be equal to performance
at lower prices
Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Buyers in Industry Suppliers
Well positioned relative to

Substitutes because: Can mitigate Buyer Power
Threat of because well differentiated
* Brand loyalty tends to products reduce customer
reduce new product trial and Substitute sensitivity to price increases
brand switching Products
Ch4-
Major Risks of a Differentiation
Business Level Strategy
Customers may decide that the

cost of “uniqueness” is too great
Competitors may learn how to

imitate Value Chain
The means of uniqueness may no

longer be valued by customers
Ch4-
Cost Uniqueness

Target
Breadth of
Competitive
Scope
Narrow
Target
Market
Ch4-
Cost Uniqueness

Target
Breadth of
Competitive
Scope
Target
tiation
Ch4-
Focused Business Level Strategies
Focused Business Level Strategies involve the same basic
approach as Broad Market Strategies.
However, opportunities may exist because:
Large firms may overlook small niches

Firm may lack resources to compete industry-wide
May be able to serve a narrow market segment

more effectively than industrywide competitors
Focus can allow you to direct resources to certain

value chain activities to build competitive advantage
Ch4-
May be able to retrofit old factories to keep costs

down
Minimize R&D costs by copying innovators
Examples:
Bang & Olufsen Upscale electronic components
Snap-on tools High quality mechanics’ tools
Iams Company Premium pet foods Ch4-

Focused Differentiators may thrive by selecting a

small market that is underserved by large players
Example:
Custom manufacturers of parts for
Harley-Davidson motorcycles
Ch4-
Major Risks Involved With a Focused
Firm may be “outfocused” by competitors
Large competitor may set its sights on your

niche market
Preferences of niche market may change to

match those of broad market
Ch4-
Cost Uniqueness

Target
Breadth of Integrated
Competitive Low Cost/
Scope Differentiation
Target
tiation
Ch4-
Integrated Low Cost/Differentiation Strategy
Firms using an Integrated Strategy may:
Adapt more quickly
Learn new skills and technologies
Utilize Flexible Manufacturing Systems to create

differentiated products at low costs
Leverage core competencies through Information
Networks across multiple business units
Utilize Total Quality Management (TQM) to

create high quality differentiated products which
simultaneously driving down costs
Ch4-
Recognize that the Integrated Low Cost/

Differentiation business level strategy involves a
Compromise
The risk is that the firm may become “Stuck in

the Middle” lacking a strong commitment to or
expertise with either type of generic strategy
Ch4-
Southwest Airlines
Low Cost Differentiation
Use a single aircraft model
Focus on customer
(Boeing 737)
satisfaction
Use secondary airports
High level of employee
Fly short routes dedication
No meals
New flight services for
15 minute turnaround time
business travelers
No reserved seats (phones and faxes)
No travel agent reservations
Ch4-

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Chapter 2

Strategy Formulation Strategy Implementation

Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11

Strategy Dynamics Strategy Governance & Control

Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

1. Identify 16 types of strategies.

is an integrated and coordinated set of

• Most organizations simultaneously pursue a

©2000 South-Western College Publishing

1. Define business-level strategy.

4. Use the five forces of competition model to

An integrated and coordinated set of

The purpose of which is to create differences

1.Reach: firm’s access and connection to

Determining the Customers to Serve

Consumer Customers Industrial

 Customer needs are related to a

 Firms use core competencies to

Broad Cost Differen-

Broad Cost Differen-

Relatively standardized products

Features acceptable to many customers

Lowest competitive price

Building efficient scale facilities

1. Determine and Control Cost Drivers

2. Reconfigure the Value Chain as needed

Alter production process New raw material

Save on shipping and cattle weight loss

Value chain linkages Wage levels

1. How can an activity be performed

2. How can a group of linked value

3. How might coalitions with other

Gallo sold wine through grocery stores rather than liquor

Can frighten off New Entrants

* Enter at large scale to

Can frighten off New Entrants due

Can mitigate Buyer Power by: Bargaining

Can frighten off New Entrants due

Driving prices far below

Can frighten off New Entrants due

Can mitigate Supplier Power by: Bargaining

Bargaining Rivalry Among Bargaining

Well positioned relative to Can mitigate Buyer Power by:

Dramatic technological change could take

Competitors may learn how to imitate

Focus on efficiency could cause Cost Leader

Broad Cost Differen-

Value provided by unique features

Command premium price

Shaping perceptions through advertising

Heineken beer Raw materials

Steinway pianos Raw materials & Workmanship

Mercedes Benz autos Technology and Workmanship

Intel microprocessors Technological superiority

Caterpillar tractors Service buyers’ needs quickly

Lowering Buyers’ Costs

Raising Buyers’ Performance

Creating Sustainability through:

Unique product features

Can fend off New Entrants

* New products must

Can mitigate Buyer Power because: Bargaining